Discuss Commercial Bank Management

You have a portfolio of two branches, Branch A and Branch B and 75 percent of your total assets are invested in Branch A. The following information is given:

 

Expected return, E(????????)???????????? ????(????????) A

 

 

Branch Expected return

Branch
A

B
Note: ????2(????????)=625, 120= Cov(????????, ????????)), ????2(????????)=196

A. Calculate the expected return of the portfolio. B. Compute portfolio standard deviation of return.

B 12%

B 120 196

 

20%

Covariance matrix A

625

 

120

 

1. Discuss the differences of balance sheets of commercial banks and nonfinancial firms.
2. What are the principal accounts that appear on a bank’s balance sheet (Report of Condition)?
3. Discuss three main characteristics of banks’ balance sheets.
4. What are core deposits and why are they so important as a funding source for commercial banks?
5. What factors influence the stock price of a financial-service corporation?
6. Suppose that a bank paying an annual dividend of $4 per share on its stock in the current period and dividends are expected to grow 5% a year every year, and the minimum required return-to-equity capital based on the bank’s perceived level of risk is 10%. Can you estimate the current value of the bank’s stock?
7. What is return on equity capital, and what aspect of performance is it supposed to measure? Can you see how this performance measure might be useful to the managers of financial firms?

 

1

 

9. UMB has the following balance sheet and income state information.

 

Assets

Liabilities and Equity

 

Cash Securities

Fed funds sold and reverse repos Loans
Fixed assets Other assets

Total assets

2,600 7,000

87

6,400 217 339

16,643

Deposits
Fed funds purchased and repos

Other borrowed funds

All other liabilities Common Stock Retained Earnings

Total liabilities and equity

13,800 1,584

5

91

21 1,142

16,643

 

Selected items on income state (in millions) 

Interest income 350 Interest expense 15 Provision for loan losses 18 Noninterest income 249 Noninterest expense 463 Taxes 24

 

(1) Calculate return on equity (ROE). (2) Calculate return on assets (ROA). (3) Calculate return on sales.

 

1. Suppose a bank reports that its net income for the current year is $51 million, its assets total $1,144 million, and its liabilities amount to $926 million. What is its return on equity capital? Is the ROE you have calculated good or bad? What information do you need to answer this last question?
2. U.S. Treasury bills are available for purchase this week at the following prices (based upon $100 par value) and with the indicated maturities:
   1. $97.25, 182 days.
   2. $95.75, 270 days.
   3. Calculate the bank discount rate (DR) on each bill (a and b) if it is held to maturity. What is the equivalent yield to maturity (sometimes called the bond- equivalent or coupon-equivalent yield) on each of these Treasury Bills?
3. First National Bank of Bannerville has posted interest revenues of $63 million and interest costs from all of its borrowings of $42 million. If this bank possesses $700 million in total earning assets, what is First National’s net interest margin? Suppose the bank’s interest revenues and interest costs double,

 

2

 

while its earning assets increase by 50 percent. What will happen to its net interest margin?

1. Commerce National Bank reports interest-sensitive assets of $870 million and interest-sensitive liabilities of $625 million during the coming month. Is the bank asset sensitive or liability sensitive? What is likely to happen to the bank’s net interest margin if interest rates rise? If they fall?
2. A government bond is currently selling for $1,195 and pays $75 per year in interest for 14 years when it matures. If the redemption value of this bond is $1,000, what is its yield to maturity if purchased today for $1,195?
3. Florida bank has the following balance sheet:

 

Assets 

Cash
Short-term securities Short-term loans Long-term fixed-rate loans Total

Million $

$35
$200
$225
$250

$710

Liabilities and Equity 

Demand deposits
Interest-bearing transaction deposits Fed funds borrowings
Long-term fixed-rate borrowings Equity

Million $ $240 $260 $25 $119 $66 $710

 

Total (1) Calculate the bank’s one-year re-pricing gap.

 

(2) Measure the impact on net income when there is a 1 percent increase in rates. 16. Discuss shortcomings of re-pricing gap.